Extending Unemployment Insurance: Three Simple Charts Against

About the Authors

Although the
perception of weakness in the labor market has led to calls for
another extension of temporary unemployment insurance benefits,
this is a political cure in search of a problem. An extension not
only increases spending by roughly $1 billion per month, but also
is unnecessary given the demonstrated strengthening of the labor
market. Most damning of all is the well-established economic
research that shows any extension of jobless claims generates
exactly the wrong incentives and will extend the average duration
of unemployment for those who qualify.

Making Unemployment Last
Longer

Unemployment
insurance (UI) makes unemployment spells last longer. By making
unemployment more attractive (or at least less unattractive) than
it would otherwise be, UI benefits tend to increase the "reserve
wage" of unemployed individuals who are considering new job
offers-a possible employer will have to offer a higher wage, or
some other inducements, before a new job is accepted.

Research has shown
that the likelihood that a UI recipient will find a job rises
dramatically as exhaustion nears. Research has also shown that
employee recalls increase as benefits near exhaustion, suggesting
that some employers may time unemployment spells to coincide with
the length of unemployment insurance benefits.

The Strong Labor Market

Initial jobless
claims are historically low. The magic number on Wall Street is the
initial claims number of 400,000 per week: Anything higher means a
contracting labor market. Initial claims are declining and have
been below 400,000 since October 2003. An even more striking view
is the number of claims relative to the total U.S. population. The
current level of population-weighted claims is as at the same level
as 1997-1999, when the economy was "irrationally exuberant."

Robust Job Growth

The Bureau of
Labor Statistics Household Survey shows that over the past two
years (March 2002 through March 2004), the number of Americans
employed increased by nearly 2.2 million-robust job growth that
renders comparisons between the current economy and the Great
Depression absurd.

Conclusion

Now is not the
time to extend unemployment insurance benefits. As reflected by
initial jobless claims data and the Bureau of Labor Statistics
Household Survey, the labor market is strong and picking up steam.
Extending benefits would do nothing to aid this recovery and could
even hinder it by raising "reserve wages" and, thereby, the cost of
filling new jobs. Thus, those who call for an extension of
unemployment benefits because it will "stimulate" the economy are
not only out of touch with an economy that's averaging 6.1 annual
growth in Gross Domestic Product, but also plain wrong.

Paul Kersey
is Bradley Visiting Fellow in Labor Policy, and Tim Kane, Ph.D., is
Research Fellow in the Center for Data Analysis, at The Heritage
Foundation.